Email this article to a friend

The European Union published the long-awaited overhaul of its main pensions regulation this morning, putting a revamp of investment rules–which it says will facilitate investment into long-term assets such as public infrastructure–at its heart.

After backing down on controversial proposals to introduce strict new funding standards for pension schemes last year, the European Commission's revised directive, published this morning, contains proposals for reform in four areas.

Firstly, a new set of competence and scheme-governance requirements; secondly, new standards governing the information to be sent to scheme members; thirdly, measures to help workers transfer their pension savings across national borders; and finally, changes to its regulations on investment.

This includes a proposal to introduce an EU law that prevents national regulators from restricting pension funds' investments into "instruments that have a long-term economic profile and are not traded on regulated markets".

The new law would make it clear that this includes debt instruments and loans to infrastructure projects, real estate and "unlisted companies seeking growth".

Announcing the proposal, Michel Barnier, the EU's internal market Commissioner, said pension funds in Europe have "over €2.5 trillion of assets under management with a long-term horizon" and that the EU's new directive would "further develop occupational pension funds as key long-term investors”.

However, the UK pensions industry reacted with dismay this morning, saying the new requirements on governance and disclosure would prove costly.

Jonathan Camfield, a partner at pensions consultancy LCP, said: "Whilst the EC has kept their promise and not imposed immediate insurance-style funding requirements on UK pensions, there are a number of potential nasty details in their proposals."

Related

Camfield said the requirement that worried him most was "onerous additional disclosure requirements on UK pension schemes, including disclosure of their finances valued as if they were an insurance company".

Dave Roberts, a consultant at Towers Watson, said the draft directive could even have an impact on the Scottish independence referendum. Under the current EU law, pension schemes that operate across borders have to maintain full funding at all times. A relaxation of this rule had been suggested, but has not made it through to the final draft published today.

The Commission has said it expects its proposals to cost the European pensions industry €22 per member, or a total €165 million, as a one-off cost and then ongoing extra costs of up to €0.80 per member, or €60 million, per year.

Roberts said that costs at this level could create “significant difficulties”, particularly as the UK government has just announced a cap on charges at 0.75% of assets per year.

In its statement, the Commission said "the benefits of the entire package of the proposal are expected to outweigh these costs" and also pointed out that national governments were free to choose not to impose the directive on pension schemes with fewer than 100 members.

The EU's revision of its pensions law has taken four years so far, and today's proposals are in draft form only. They must still make their way through the
EU's complex legislative machinery on the other side of European elections in May after the election of a new Commission.

The proposals have also been subject to considerable revision. At the start of the process in 2010, EU authorities had been keen to introduce new European rules on pension funding standards, which were to be based on the equivalent regulations for insurance companies, known as Solvency II.

In the face of a violent backlash from the workplace pensions industries in the UK and the Netherlands, later joined by key power-brokers Germany as well as the Irish and Belgians, the Commission backed down on the proposal.